Join the team as they discuss the potential merger of DJs and Myer, the importance of reporting season, and ask if jeans really are cool.
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For the next couple of weeks we'll be transcribing the Doddsville podcast. Please let us know in the comments if this is useful so we can decide whether to continue doing so. We're publishing the transcription as is. There will be errors, but we hope it's valuable nonetheless.
Reporting Season, Department Stores, Jeans and Athletes
Welcome to the Doddsville Podcast for Thursday the 6th of February 2014. Join the team as they discuss the potential merger of DJ's and Myer. The importance of reporting season and ask if jeans really are cool.
GS:Welcome to Doddsville I am your host Gaurav Sodhi, joining me today is analyst James Carlisle, welcome James.
GS:And joining me also is Analyst Jason Prowd, welcome Jason.
JP:Good morning Gaurav, good morning James and morning everyone.
GS:James we haven't had you in a while what has been going on, have you been looking at any interesting star formations, been finding any strange observatory parts lying around?
JC:I don't know I was up at Hawks Nest over New Year and saw some good stars out there, yeah there was [unclear 0:01:26] in full splendour and I just had my binoculars with me so I looked at …
GS:It must be very disappointing for you, James is well known in the office for knowing all the intricate details of what goes into making a telescope.
JC:Well I wouldn't quite say that, but I am interested in them anyway.
GS:He calls them very different names though he calls them very long obtuse names …
JC:What you mean eye piece, you mean things like that, pretty obtuse, yeah.
GS:That is just complicated, that blows my mind. Right Jason we should probably have a chat about this reported merger of Myer and DJ's.
JP:Yeah good idea.
GS:Now this began as a rumour last week I read in the AFR, in that wonderful street talk section which I think is full of innuendo that always ends up being true, it's got an uncanny knack of making a head start of rumours.
JC:People feed it stories.
GS:Yeah that's true I was trying to give them a bit more credit. But it was actually confirmed that Myer rather made an offer for DJ's, an [unclear 0:02:26] script offer. Talk us through what that offer was and then perhaps we can have a discussion about why a merger would be sought in this sector.
JP:I was a bit surprised that they came out and confirmed it actually I thought it was investment banking wishful thinking looking for another deal, but it looks like Myer has approached David Jones offering stock in exchange for the company, for the merged entities, no premium and David Jones just instantly batted that away and said look we are not going to entertain anything that doesn't offer us …
JC:It took them a month I think didn't it to bat it away, they were sitting on it for several days of course which what enabled the two directors to do their share trade in the meantime. But anyway sorry I am possibly picking hairs but I think they did think about it for a bit, but I think the initial reaction was they were never going to go for it but anyway, sorry carry on.
JP:Yeah that doesn't surprise me at all even if you were wanting to merge it kind of makes good negotiating sense that you don't accept whatever the first offer is. And if you are David Jones, you know David Jones a shareholder I think asking for a premium to the share price makes sense, its not like David Jones is particularly expensive at the moment so Myer are being a bit opportunistic their share price had risen a lot over the last year, David Jones hasn't as much so I can see why Myer made the move when they did. The real question is does it make sense for both of them to get together, would the A Triple C potentially step in and stop a merger happening and what are the other kind of spin off implications and what does it say about retail more broadly. So I think I will start with the last point and I think that this wouldn't really be a merger to make the businesses stronger it would be almost defensive.
GS:A defensive merger, yeah.
JP:Yeah and I think both of the department stores have really struggled over the last few years, they had a great run there a decade ago and they made lots of money and they didn't really invest in the future and they got to sort of three years ago and profits fell of a cliff and said 'no we have really got to get back to retailing basics' and both of them announced strategic plans that was something any first year business student could have came up with, it was sell merchandise people want, you know increase their margins, increase stock turn, decrease stock that doesn't sell.
JP:Yeah be better retailers, all very sensible stuff and they have been making some progress at that there is just questions around does the model work, does a model of having a really diverse range of merchandise in lots of stores across the country when you have people just being able to jump online and buy from all the department stores across the world make sense anymore.
GS:But one of the great benefits of Myer and DJ's has been the very large store format and the range of goods they sell makes landlords tend to give them favourable rent terms and that actually lowers their cost. So it's questionable whether after making changes to the store format and reducing the number of goods they sell whether the landlords would still view them as anchored tenants and whether they would be willing to give them discount. So they have to respond to some of the pressures on them but their response itself may cause other problems and I think rent is one that they may struggle with.
JP:I think that is a really good point like it can't really be overstated they are paying less than a tenth of the rent on a per square metre basis compared to, especially a retailer say in the average Westfield and they are getting that discounted rent because they are bringing people to the malls. And a merged entity I wonder what they would do with all the stores, there is lots of …
GS:You would think that whole rationale for merging would mean smaller product offerings and less stores, right?
JP:Yeah and potentially re-letting out some of those long leases they have, so they hold a number of 20 year leases in shopping centres with really low rents where there is a DJ's and a Myer in the same shopping centre. So the first question would be would they be able to maybe sublet or come to some arrangement with the owner of the building where they get out of that, its like they close stores and get approximately the same amount of sales but save a bit on the rent front. It all to me sounds a bit defensive.
JC:It demonstrates how much trouble they are in doesn't it, I mean if they are talking about having a shopping centre with a Myer and a DJ's and you drop one of them and focus on the other that is by its nature defensive, and tells you that they are struggling and the only way they can compete is by giving themselves a monopoly. I think the thing is, and I think you touched on it when you mentioned the landlords and Westfield being the obvious one. In a sense they are the new department stores, aren't they and in the old days you would go to DJ's because you would be able to go and you know go to the different departments or whatever but now you just go to Westfield don't you and they have all the different shops, its just a slightly different … but is slightly bigger and what they are doing is they are selling the experience and I think that is what you have to do now when you are competing with the internet and so you know a Westfield is going to have cinemas, its got a food court, its got cafes, its got all these things which attract shoppers rather than just the shops. Now you know department stores if they are going to try and compete they need to do those things as well, but you are not going to do that by getting smaller so I think, I don't know I think the talk of the merger demonstrates the problems but I don't think it does anything to gear them.
JP:And then they have lost that battle already like in the Sydney CBD here I think it's a really telling example you have the original David Jones store which could have been upgraded and could have been a real destination centre, I mean its had a food court ever since the market street stores existed and they allowed Westfield to build a fantastic new asset next door that is just significantly better that has a much nicer food court, that has a much more luxurious spread of retailers and you are right it has effectively become the destination department store without being a department store without all the hassle of actually having to run retail stores, they have got retail stores …
JC:And they can turf out one department and move in a new department you know if the old one is not making so much money, so they are having this sort of survival of the fittest amongst their departments, I mean it's a way better model than poor old DJ's and Myer.
GS:You are right Jason that is actually a really good example of what is wrong with DJ's and how Westfield has just walked all over them, and anyone who has been to Sydney would see this old decrepit DJ's building next to the shining new Westfield building and tells you so much.
JC:To be fair that Westfield would not be anything like what it is if it wasn't connected to Myer and DJ's, so I suppose there is something in it, but you know it certainly highlights a lot of their problems.
JP:But it's more parasitic than symbiotic.
JP:I am sure they built it there because that was the centre of retail in the city but I think they have absorbed a lot of …
JC:They have taken a lot of …
GS:Let me put something to you both I think the threat of online retail has been overblown. I was looking at some stats and they were saying that only 6 per cent of all retail transactions are done online that includes overseas and local internet sites and overseas the average is around 10 per cent, in more mature markets it's a little bit more but nowhere is the internet …
JC:But its not just about buying your stuff online, its about the fact that shoppers are just so much price aware so you can go online and you can research and find precisely the bed that you want to buy and you know exactly how much it costs, you know how much you could buy it online for if you chose to and then you can go to Captain Snooze and say 'look this bed costs this much, are you going to sell it to me for that or do I have to go down the street'. And that is the real threat I think that you know …
GS:I agree with you James that is a major part of it but the other thing is the increasing competition, now DJ's and Myer has had to cope with a whole host of foreign competitors with very strong brand names entering the local markets, trade is a very small market and in the last few years we have just had a slew of international competitors. Now James you were telling me this morning that Marks and Spencer is popping in the Japanese giant UNIGLOBE, Zara of course and the H&M something …
JP:Yeah H&M, we have already got Top Shop we have already got GAP you know like most of the international or power retailers …
GS:And the model isn't too different from Myer and DJ and all of a sudden there is an awful lot of competition, I just think that is one area that probably hasn't been emphasised enough and the internet maybe be over emphasised and the solution to excess competition is much trickier than a solution to price driven …
JC:[unclear 0:11:02] to the internet is very hard as well.
JC:Well what [unclear 0:11:07] more retailers can do to come back through the internet is pretty tricky, don't get me wrong the competitor threat is massive as well and you know I think …
JP:But the problem is that I don't think the right thing to do is look at it on aggregate, so sure I mean 5, 6 per cent of sales are online but if you are going to look at the percentage of sales per category, because there aren't many retailers that operate across the board and we are happy to admit that a supermarket retailer selling groceries is much more insulated through the internet than and electronics retailer and if you look at say the percentage of sales of DVD's or content you know its now 30, 40, 50 per cent online. So there is parts of retail that may well survive and even do well in a new retail environment and there are parts that will do very badly. So I think those aggregate numbers probably don't help, and also it's the margin that counts so if you are very low margin business and most retailers are and you lose 5 per cent of your sales online that might be enough to mean that you just stop, your profits halve. So I don't think you need a big shift online to have a big impact on profits but I also agree that Australia has had too little competition in the retail space for too long, our retailers have become a bit bloated and that has meant that this competition factor I would agree people have under weighed and if you are an Australian and a power retailer I would be pretty worried, if you are sitting there in your just group and you are running these run of the mill female power brands and you have suddenly had … you meet Chloe, GAP, Zara, H&M, Top Shop turn up on your doors who are probably more than willing to run loss leading stores to gain a foothold in the market, I would be very worried.
GS:The point I just quickly wanted to make regarding online was that we often think that online stores have this enormous cost advantage and it's just not true. Most online stores don't make a profit at all and they are supported by private funding until they collapse. So most online stores they make a big song and whoa but they ultimately fail and that is because the returns online retailers are astronomical. So between 50 and 60 per cent of all their merchandise sold of every single item that gets sold gets returned to them and they then have to handle it and repay the money and that is their single biggest expense running an online business and that just does not exist in a retail store.
JP:Yeah I think it depends again on the type of retail store we are talking about, so from my understanding like a NET-A-PORTER which sells sort of luxury fashion accessories and clothes based out of the U.K is actually doing quite well because the dollar value of each item they have to ship is quite high, so the shipping costs relative to the sales are quite low. So even though they may get lots of returns and that is sort of part of the service they are sort of doing enough dollar value turnover, the average transaction cost is high enough to kind of justify the model.
GS:I would suggest that is a rare example of success more likely you find, people like retailer such as, what is that one in Australia the Iconic, right it doesn't make a buck in profits but the spend an enormous amount in marketing and its supported by funding, that may or may not last.
JC:But crazy competitors are still competitors and you can see … its actually one of the warning signs of competition in the market is where you have got crazy competition and I think that is one of the other things that the internet has brought in is the ability for any old person or funder or whatever to set up a store online at the drop of a hat and make losses for a few years and muck everything up for everyone else and then go bust.
GS:Yeah I think that is a fair point.
JC:It makes life very difficult.
GS:The other thing we should quickly mention are some of the proposed benefits of the merger, now Jason the management of Myer is saying that they can realise synergies and that is an awful word so I will use abbreviations for it. They are saying they can realise synergies of 900 million dollars and they will close 10 stores in all, that seems like a fair … I mean that is sort of a third of DJ's market cap isn't it, that is a big chunk of savings and it makes me think that the merger is inevitable it will actually happen at some stage.
JP:No I must [unclear 0:15:22] because I don't know exactly where these savings are coming from but I can take a good guess, I mean the first thing I would do if I merged them together is potentially sell off David Jones property or spin it off in a property trust so they have 600 million dollars worth of our CBD real estate so potentially Myer are looking at that. From my understanding there is a bunch of stores where the leases come up for renewal quite soon that could be closed, the difficulty is that those savings are really premised on the idea they wouldn't lose a lot of sales but they would be able to potentially migrate sales from a David Jones from Myer vice versa and I think what might happen is you get a natural break for the customer that you don't end up combining them together and have one plus one equals two, you probably have one plus one equals 1.5 and you probably lose a lot of sales if you closed stores you might make up for it in savings but I don't think its as simple as looking at what the gross revenues of DJ's and Myer and putting them together and deducting some expenses out. I think that most of that would be given up in savings or loss of sales, so if you did do this I wouldn't get too excited that you are suddenly going to have this super profitable department store business, its more that it might protect them from inevitable competition by making them not have to compete against each other.
GS:James what do we call this monstrosity if it ever happens this big merge department store.
GS:I reckon I think the name should reflect where the business has come from and it has come from a lot of difficulties so I think we should call it Quagmire.
JP:Well I was going to go for David Myers or Myer Jones. I don't know if Quagmire would get too many people coming through the doors.
GS:I would definitely shop at a Quagmire—self loathing would demand it I think.
JP:I mean actually probably a better strategy to be completely honest would be to keep both the independent brand names, clothes stores where the demographics are different and sort of …
JC:They are planning to make DJ's more high end or the idea behind it is to make DJ's more high end and Myer I think a little bit lower and it sort of differentiates them a bit more and keep both brands, so I suppose in that respect they are not completely defensive, anyway I think we have covered it.
JP:Okay we don't even want to talk about department stores anymore.
GS:Lets move onto reporting season, James February and August are two very busy times for analysts we are all rushing trying to cover the results of all the companies which hopefully decide to release results all at the same time and often within the same fortnight.
JC:Often within the same day.
GS:In the same day sometimes, yeah. So it means as professional investors we are quite busy at this time but for most investors I wonder if reporting season matters at all, companies now are very good at massaging expectations, there are very few surprises the reporting season doesn't move prices as much as it used to, does it matter anymore, should the investor who doesn't follow the market everyday should they care about reporting season.
JC:Yeah I think they should, these are the times of the year where you have got fresh numbers to look at, these are the times that long term investors really should be paying attention. I think other times where the price moves and there is no reason for it, you know there is less reason to watching closely. I think as you say companies are managing expectations much better and as a result you probably don't get quite the same price moves on the day as you may have done in the past but that is not the concern of the long term investor, our concern is that we are getting the freshest numbers available from these companies telling us about you know how their trading is going, how their business is going, what they are doing to try and make it better, how the cash is flowing through. All these things which have huge impact on their long term value and we get the most up to date information and also you know if you read between the lines of the presentations, the outlook statements all that sort of thing and even listen online to the conference calls you can pick up a few little interesting tit bits about the business and the industry, you know its all very good information and needs to be put in the pot and given a good stir.
GS:I am just thinking that you said tit bits and not tid bits I am pretty sure.
JC:I suppose it's both, actually I mostly use tit bit.
GS:It must be the British thing.
JC:I think British is …
GS:I am doing everything I can to stop from giggling right now.
JC:The Brits prefer tits to tids.
JP:Look I agree with [unclear 0:20:03] main sentiment, I just think for most investors …
JC:The tits or the tids?
JP:I think for most investors it's the process in which you go through and look at the results that can yield the best outcomes, we actually wrote a little article up in August last year about how do you actually go about analysing a result if you have got a short period of time and you don't want to sit around all day reading results. And I think the first main point is to have an idea of what you are expecting before you see the results and to look at the financial results first before going through the presentation slides, and if you do those two things you are much better off to sort of wade through well actually a management spinning a bad result in a positive light or are they talking down actually what is a good result and if you have an idea of what you expect from a company you are in a much better position to judge whether it's a good or bad result. Because often I have been expecting something out of a company, they have announced what I think is quite a good result, the share price falls 10 per cent because the market was expecting something even more outstanding and actually I will come along and say no that is a pretty decent result I don't need to worry if the share price fell 10 per cent, or you might have the reverse happen. So definitely have an idea of lets say you own a company and you want to know, well do I think its going grow profits this year, do I think that is going to have gone up, what do I expect is going to happen before I see these accounts?
GS:And the other crucial point, I am glad that you raised it. Reading the financial statements before you read the commentary is a small thing, maybe it doesn't seem like an important thing but it makes a world of difference going through many many companies doing that. Often you will go through the financial statements and a few things will stand out and a few questions will start to form in your head and you start wondering, well I wonder why that happened. If its not mentioned in the commentary its probably worth investigating a little bit further because the commentary wont always deal with the most difficult issues, they will try and … I mean a lot of businesses are part marketing machines as well I mean they are trying to advertise for capital, so they have an incentive to spin things well and that means that us as an investor our job is to be alert to that and to look for what they may be hiding.
JP:Yeah and depending on how much time you have got a really good idea is also comparing to how they are presented, their presentations the previous years. I have often noticed a lot of companies will present data in a really useful way for 5 years in a row and then the 6th year they will just completely change their presentation or drop out some details they used to present because those numbers are no longer positive and you can almost guarantee that if a number used to be presented and now it isn't its got worse.
JC:That is absolutely right, actually ResMed last week, one of the things they did in their result one of the slightly concerning things that they have stopped reporting on the average selling price, movement in the average selling price because they have decided that its not very good …
JC:That's right it has been going down but obviously they say they don't want their competitors to have this information.
GS:That sounds fair doesn't it?
JC:It does but its just the timing of the change, you know all of a sudden, in the past the competitors have been able to use that information but it has been going up nicely and managements like to show off about it and all of a sudden … yeah I like ResMed and I can understand why they would want to do that but the timing of it does seem a little bit fishy.
GS:There is all sorts of little games that go on so I am taking a guess at what is going on there it's a fairly concentrated market and I think there is a little signalling happening so when the prices are going up ResMed is happy to tell its competitors, 'look guys our prices are going up maybe you can do the same'.
JC:Join in, yeah but when they are putting the prices down they don't want to encourage anyone, I think that is exactly right.
JP:What is some other kind of things you guys have noticed in reporting season that management do kind of pull the wool over investors eyes, what do we look out for.
JC:The obvious thing is which Gaurav has already touched on which is just focussing on the good bits and not focussing on the bad, so the crucial thing is always to see how cash is flowing through a business I think and if the cash flow isn't reflecting what is happening with profit then they really need to be telling you why and if the presentation doesn't explain why then you need to expect the worse I think.
GS:I think understanding the different matrix that get used are actually really important, so profit is a good example it generates the headlines, if you read about a newspaper article they will talk about the reported profit but he profit isn't a counting number and you have to be aware of all the adjustments that are made to it. And management will also have … they will always report in underlying earnings and its very important to understand what gets excluded from underlying earnings.
JC:Yes there is nothing wrong with underlying earnings.
GS:No there is not, but you have to …
JC:But you need to know where they come from and make your own adjustments.
GS:A classic example is lots of asset heavy businesses that I look at tend to report EBITDA, earnings before interest tax, depreciation and amortization and that seems harmless enough but of course in an asset heavy business depreciation is perhaps your biggest expense so to exclude that from your profit line is like reporting profit without any expense, and that sort of thing happens a lot and you just need to be aware of that.
JC:The other thing I always think is important to look at is how management is talking in terms of the long term and the short term, like some managements are always talking about how trading is going this month, next month, we have made a good start to this half you know this current period all of that. Which you know its all good to know but its important also to see management talking about what its doing for the long term good of the business and you will see really good companies, you know ARB for example is a good one which you know it says okay trading is this, trading is that but then it will, you know they say a bit about what they are doing for the long term good of the business and sometimes its all a bit nebulous but its important to see that is the focus.
JP:Yeah it's a bit of a worry when there is no eye for the long term in the people running you know your investment, you want them to be saying look in the short term we are doing this, this and this and over the next 5 years we want to do this. Now I understand managements are often quite coy about this, they don't want to telegraph their long term strategies but they at least have to acknowledge that they have got one. I am a little bit worried I have interviewed a few management teams and I have asked them about the long term and they say, ah we don't think out further than 12 months, and I am like how do you possibly make sensible capital allocation decisions or training decisions or any kind of decision if you are not thinking out longer than a year away, its very worrying.
JC:ARB will telling you that it's building a new factory in Thailand because that is where the most skilled workers are and its needs to counter this threat or that threat and it will have a 5 or 10 year perspective rather than a sort of 6 month perspective and that is a very good sign.
GS:Right James well lets mention names now, now what business are you particularly looking at, concerned about, excited about any one or two in particular.
JC:Yeah one or two spring to mind, I suppose car sales would be an interesting one that is a business that we like which has a very strong position obviously on the online car, second hand car retailing. And the share price has been on a bit of a downward track the last sort of few months, I suppose when was it, September last year when there were reports which were subsequently confirmed that car makers were asking dealers not to list new cars on the site. Now this has got … there are implications for the business quality there but in terms of the numbers that is a pretty small deal at this stage, it's only some car makers as well. And the bigger sort of fact for the short term numbers is that last year they were putting up prices for the dealer channel and that should translate into some pretty good numbers. So I am hoping to see that confirmed first of all and I guess now I am sounding all short term but I think I am hoping it will get people focussed back on the strength of the cores business. I guess I wouldn't be surprised if it goes down bit and then it's likely to go up, but yeah I am being short term, but anyway that would be care sales. ASX I will get back onto the long term with ASX because that is an interesting one because it has just been opening up, starting up new businesses and in July or maybe it was June they launched their business clearing OTC interest rate, the Aussie dollar interest rate swaps, a bit of a tongue twister that. Anyway derivative clearing, OTC derivative clearing and you know it will be interesting to see how that is going really because that is going to make, hopefully going to make a big difference to the business over the long term and so we want to … it will be very small in terms of profit numbers, in terms of short term of course the thing with ASX is that fact that the float market has been a bit better so there might be slight improvement in profit there. Although secondary capital raising is apparently still pretty slow, so the more important thing for ASX is to see how these new revenue generators are going so I look forward to that.
GS:Alright we will keep an eye on that, Jason.
JP:I have got a few areas that I am looking at with interest, retailers in particular so the electronic retailers, so David Jones, JB Hi-Fi, Harvey Norman recently we downgraded Harvey Norman's I am interested to see how those results go and then more broadly the apparel retailers as well, so speciality premier Kathmandu sell their … they are all fairing I think there has been a lot of expectation built into a lot of those share prices and I haven't really seen macro environment that would lead to good retail profit so that will be interesting to watch. A bunch of the high P industrials, so everything got bid up over the last year any business that sort of looked half decent went up in price, so we have had Floats like the insurance brokers that are now trading on 25 times cash flow, I mean, I think OS brokers and Steadfast are good businesses its just whether they can justify their current valuations, I will be watching them. And a bunch of other floats as well that came out last year and then some of the healthcare stocks as well I think, a stock like CSL which is a business which we have liked for a long time and we bought at much lower prices and now its on a very high multiple, the question is can it keep delivering earning, growth to justify its current valuation. So that is another one where it has surprised in the past, you know we have been expecting 10 per cent profit growth and its delivered 20, so it will be really interesting to see what it has been up to over the last 6 months.
GS:Look I agree with that general point as well, the market has been pricing anything that pays a dividend quite extravagantly, there has been a lot of P expansion so to justify that profits have to rise. So really as long as the number is up and up more than the market expects I think things should be okay but I think there is a lot of room for disappointment because expectations are fairly high at the moment. Now the other thing I use reporting season for is whenever a business or an industry is against the wall it really helps to get half yearly updates about how the management of the business is responding to problems and in that regard gold producers would be interesting because they have a fierce job ahead of them to cut costs and to get production at more profitable levels so the industry is going through something of a change and so whether we like gold producers or not it would be interesting to see how they are responding to the changes, I agree that retailers again structural change, how they respond would be really important.
JP:Just back on gold is there any particular ones you are looking at Gaurav?
GS:Yeah look I think Silver Lake and Northern Star in Australia are probably my two favourites and they have been responding very aggressively in very contradictory ways to the falling gold price, Northern Star has gone and made several cheap acquisitions, Silver Lake has gone on a massive cost cutting drive and is really changing a lot of operational, just small operational things to generate efficiencies and I think both have done a good job but both have to reduce costs quite heavily so I will be watching those two. New Crest will be interesting because I actually think they need to split that business or sell some major assets so I doubt I will see an announcement that New Crest is doing that but it would be nice if that happens. Building materials I was going to say is the other one that would be quite instructive because you know the market for construction seems to be running above its long term average so it will be interesting to see whether the results of that flow onto the building materials companies.
JP:So we are talking about companies like James Hardy, Boral, and Brickworks which have a big …
GS:Yeah those sort of firms so they will be interesting as well. We publish quite extensively on reporting season so you can check out our views and reviews on the website.
GS:On to our favourite, sorry I mean our final segment long or short. James I am going to begin with you this time, now it has been said that jeans have been the icon of fashion for decades now, ever since I can remember people have been wearing plenty of jeans and wearing them enthusiastically is this just a very long fashion cycle that is going to turn at some stage.
GS:Do you think there is something to this, so have jeans become a norm and is the market for jeans just wonderful, are people always going to be wearing jeans?
JC:There is no substitute for a good pair of jeans.
GS:I had a feeling you might say that.
JC:I love jeans, they are comfy, they don't crease, they hide the stains, you can wear them for weeks without a wash.
GS:You're supposed to wear them …
JC:You're supposed to wear them for weeks without a wash. I am very long, very long on jeans.
GS:Okay James is long. Jason I know you are quite the connoisseur as well and there has been an explosion in this high end, I mean jeans are no longer the being made in China, made in Bangladesh phenomena, in California there is a new cluster of expensive jeans and they are all making a [unclear 0:34:12], J Brand and Nudie are probably the two most prominent brands, they are making heaps of money, wonderful margins. Again is this a fashion trend or is this sustainable?
JP:I think it's a bit of both its definitely been a big trend towards designer denim over the last decade, you know we had the 80's which was just denim everything you know you could get away with wearing denim jackets and denim shirts and denim everything.
JP:Jeans have definitely become a more luxury clothing item, you no longer just have Levi 501's for 80 bucks a pair from Big W, you know you can spend …
JC:501's are pretty high end aren't they they are a pretty fancy pair of jeans.
JP:I am just saying they are what people … maybe not in Australia but as far as America is concerned they are considered a pretty standard pair of jeans, you go to Costco in the U.S and buy a pair of 501's for 40 bucks, in Australia that translates to 80 dollars …
JC:Can I just say I have got no time for that denim, you know the sort of stretchy kind of denim the sort of cheap … you know the sort of stuff I mean, maybe that is the stuff that they make girls jeans out of ….
GS:You're talking about jeggings!
JC:No, jeans shouldn't stretch.
JP:Having a bit of elastic in jeans is very beneficial, now there has definitely been a change in the type of jean brands you can buy and you can spend hundreds and hundreds of dollars on jeans now. And I think part of the appeal is that its just a versatile clothing item I mean even an expensive pair of jeans is cheaper than an expensive pair of like wall pants. So there is a bit of that, there is also the fact that wearing casual clothes to the office is much more acceptable now, I mean casual Friday was invented by a jeans brand.
GS:Is that right?
JP:Yeah to increase ownership of jeans, you know that is an idea that came out of an ad agency so it's not surprising they were all like wearing a lot more pairs of jeans now. But I find it hard to believe that some of these brands can continue to make lots of money because its very easy for anyone to start a cool new denim brand, there seems to be just hundreds of them now every time I go looking for a new pair of jeans there is some new brand that is claiming to be even more organic or even more fair trade or even more comfortable or whatever than the last brand was. I also think most brands have their time in the sun and that is often a kind of 10 or 15 year period and after them some other brand will come along and supplement them for popularity. So while I think everyone will keep wearing jeans I don't know if I would be investing in jean brands because of that, I think there aren't very many competitive barriers to entry in selling luxury clothes like this.
JC:It's not all about investing Jason you have just got to enjoy it.
JP:Oh yeah I am long on clothes, I just wouldn't be investing in these brands on the basis that Nudie jeans will make excess profits forever.
GS:Yeah I broadly agree with your points, James like you I think jeans are wonderful, I do worry about the [unclear 0:36:57] of the fashion there was a point in the 90's where Levis got in real trouble because jeans suddenly became unfashionable and cargo pants were the rage.
JC:Does that mean you have to sort of stop wearing them though I mean what does it matter to you …
GS:Of course it does.
JC:I see you have a bit of a fashion there.
GS:Well can't you tell?
JC:No I can't tell, I can tell that Jason is very …
JP:I have to say if you grew up in the 90's there is a definite group of people who won't wear jeans, I have a whole bunch of mates who never wear jeans because they grew up when cargo pants were cool and so they just wear like chinos or cargo pants still, they have never got over that trend. So it is possible that less denim will be sold if …
JC:Drainpipe jeans was me, I was in the early 80's it was all these tight … and quality suede shoes and drainpipe jeans.
JP:And those hyper colour shirts … and made them wearable, I don't know how people wore those really tight jeans, that really heavy denim …
JC:Oh it took 10 minutes to get them on.
JP:So I think we are all long jeans?
GS:I think we are all long jeans. James I am sure you are watching the Aussie open?
JC:Yeah, well no actually not at all I think I watched one set of Murray … or something else.
GS:Well there you go, forget about this, we're done let's come back next week …
JC:I will answer your question anyway, keep going.
GS:Alright well if you had been watching the Aussie open you would have seen a splendid performance by the Chinese tennis star Li Na she destroyed the woman whose name I can't pronounce, but I think she is from Poland.
JC:The new Sharapova.
GS:The new Sharapova, is that her.
JC:There is a new Sharapova but I don't know who it is.
GS:But Sharapova isn't Polish is she?
JP:She is Russian but she is kind of like a fake Russian she has lived in Florida since she was 3 or 4.
JC:Anyway let's get to the point, go on.
GS:So Li Na made this terrific funny speech after winning the Aussie open.
JC:Was it a funny speech?
GS:It was quite humorous, yes I chuckled a few times, I can recite some of the jokes if you like if you are that interested?
JC:No I'm good but go on.
GS:I'm trying to James this is my point I'm trying to.
JP:Yeah it was the Slovakian woman she played against.
GS:Excellent thank you gentleman. Now Li Na was making this terrific speech and she got criticised in China because she failed to thank the Chinese state after winning a major international tournament and there is this unwritten rule in China that any athlete because they have this huge state dominated programme, any athlete should thank the Chinese state for picking them, plucking them out at the age of 5 and putting them in tennis camp and then training them.
JC:And spending all the money on them.
JP:Isn't Li Na fighting the Chinese at the moment to get more of her winnings or something.
GS:Well that is sort of a separate issue Li Na actually left the Chinese system and has been training, she has been training independently and the Chinese state actually taxes its athletes winnings I think 70 per cent. So any athlete that goes through the Chinese system gets taxed 70 per cent of their earnings to pay for all the support that they get as kids and Li Na because she had left the Chinese system she is saying she is not compelled to do any of that, and this has got me thinking …
JC:This is a very long question.
GS:Yes, but this got me thinking about athletes in the West and you know we don't go through such an invasive development system, no one is plucked out of school at the age of 5 or 6 the way they are in China, but athletes get an awful lot of state support and its all subsidised so the AIS takes hundreds of millions of dollars a year to run and think of all the ways that athletes benefit from the state and yet all their gains …
JC:This is sounding more like a rant than a question.
GS:Well this is what it is, then all their gains accrued to the individual, so I am just saying is there a case that we should tax athletes more or should they pay for their athletic education? James?
JC:Well the point is that the state actually wants these athletes to be really rich because then it encourages more people who go and become really good athletes and win gold medals and do all that which is supposed to be the feel good factor and all that. I have no trouble with it whatsoever, I will go a step backwards as a pom I would say that I was intensely embarrassed, mortified, by all the gold medals we were winning at the Olympics last year, there was supposed to be this big feel good factor and I was just watching all these gold medals pouring in and thinking about all those hospitals and schools that weren't being built. And I think we have so got our priorities topsy turvy, you know if China wants to win all the gold medals let them and if they want to win the tennis then let them. I mean the thing has got out of control, you know we all enjoy watching … I used to enjoy Bjorn Borg against John McEnroe so much and these guys wouldn't stand 10 seconds with the modern players because you know they just didn't have the training but the tennis was fantastic to watch, John McEnroe was so good to watch but he would get ripped to pieces nowadays. You know all this money that is spent doesn't actually increase the entertainment and it just means that we are not spending the money on schools we are spending money on turning people into good tennis players, that is just not right. And I don't know the fact is that you know it is said to increase the feel good factor, I think its increasing your feel good factor then you have got your priorities a bit wrong and I think that we shouldn't be spending any money on all this, people should get to the top through sheer hard work, they should knock golf balls against a water tank with a cricket stump and …
GS:Grab the Levi's by the leg and pull them up.
JC:And if that means you don't get any gold medals then when eventually you do get one, and I know this very well because I am a pom, when eventually you do get one gold medal you really cherish it and that is a much better way to go.
GS:I like it. Jason?
JP:Yeah I think we have got to be careful with how we look at this it will sound very strange saying you want to decrease sports funding but there are some sports that are funded very very well and some sports that are funded basically not at all. So I understand that for a whole bunch of professional athletes they are probably out there struggling and its kind of one of those industries where the top ten people in any sport do extremely well, hundreds better than the rest of the population and most of the rest of the people are effectively on the poverty line. My understanding is that if you are not in the top ten or twenty of the world tennis circuit you will lose money.
GS:That is not quite true but it's not far off either.
JP:But I mean I don't see why we couldn't have a HECS like system for sports in Australia, like why not provide a system that if you want to become a professional athlete fine we will encourage and support that and we will allow anybody equal access to that training, but if the state is providing training you are going to pay it back to us, now you could do that, you could do an equity share of the winnings. I mean like a lot of successful Australian athletes have been very generous in giving back to sport when they have been successful the problem is that is on them, you know its all very well for Ian Thorpe to be generous and build a swimming centre, I just prefer a more fair system where if you are successful you pay back the money and that is fine, that seems fair enough we do it with University education why can't we do it with sport.
GS:I was going to say any system that encourages costs to be borne socially and the benefits to accrue individually is probably inequitable and we are very quick to …
JC:Very well said, yeah …
GS:Well I spent 10 minutes before hand in … I completely lost my train of thought.
JC:Sorry, go on.
GS:And we are very quick with Universities, you know professionals and people who earn lots of money through non athletic means say to tax them, but athletes I think they sort of get a free pass a lot of the time so I wouldn't mind seeing a system where, a HECS style system where a lot of the state sponsored support gets repaid or at least contributions that the support gets repaid. But it's a controversial idea you are probably right Jason we are probably being called on Australian right about now. Which is a good time to wrap things up, James you are looking very tired over there.
JC:Yeah I was up at 6 this morning to take my son to swim training, so there you go.
GS:There you go.
JC:And he is not getting any state funding I will tell you that! He's not getting any funding at all actually just pocket money.
GS:Right well Jason and James thank you very much for joining me and for everyone else thank you for listening.